How To Know If Your Business is Financially Healthy

Financial health is the heart of every business. It plays a vital role in determining a business’s efficiency and performance. Are you about to establish a new venture? Have you been in the industry for a long time? Whatever the answer is, it is crucial to understand your business’s financial health to determine its continued journey.

Knowing if your business is financially healthy will help safeguard major issues from arising and causing irreparable damage. Bookkeeping can help you know if your business is flat-lining or thriving because it details and updates your accounts and financial information.

Paying your workers monthly salaries is not the only determinant of a successful business. Do you have a steady cash flow? Are you saving any funds? Before we talk about how you can identify if your business is financially healthy, let’s see what a financially healthy business means.

What Is a Financially Healthy Business?

For a business to be financially healthy, it should control and manage its cash flow, profitability, operating efficiency and solvency within acceptable ranges. When you have deep knowledge about financial planning and management practices, your business has a great chance to be financially healthy.

How to Know If Your Business Is Financially Healthy

Sometimes, you get so busy with everyday tasks like making sales and managing customers that you forget to look at the big picture. Everyone wants to gain from their business. One way to do so is to check if the business is financially healthy. Here are tips for knowing the financial health of your company.

Know Your Numbers

Your books should contain information about your revenue, payroll, assets, equity, liabilities, overhead, cost of goods, expenses, and more. Every line item is essential, and you need to know them.

Knowing your numbers is the key to laying a solid foundation for a financially healthy business. 

Track Key Financial Ratios

You can use the numbers in your books to gain helpful information about the state of your business health. However, there are also many financial ratios you can use to assess your business health.

Liquidity Ratios

Liquidity ratios check the ability of a business to pay its bills when needed. It indicates the ease for businesses to turn their assets into cash. The current and quick ratios are the two common examples of liquidity ratios.

The current ratio compares the total current assets of a company to its total current liabilities. It shows whether a company has enough cash flow to meet its due debts with a safety margin.

To calculate the quick ratio, subtract your stock on hand from your current assets and divide the answer by your current liabilities. The quick ratio determines a business’s ability to meet immediate obligations using its most real liquid assets (quick assets).

Solvency Ratios

Solvency ratios show how your company can repay its debt obligations through sources other than cash flow. The leverage ratio and debt-to-asset ratio helps determine the solvency ratio.

The leverage ratio compares the total liabilities of a business to its equity. A high ratio often makes it difficult for a company to continue borrowing.

Debt to assets is a ratio of the total liabilities to total assets. It indicates the percentage of assets that creditors finance. In many cases, this ratio should not be more than 1.

Profitability Ratios

Profitability ratios not only evaluate the financial health of your business but also compares your business to others within the same industry. Common profitability ratios include gross margin ratio and net margin.

The gross margin ratio compares a business’s gross profit to its total sales. It evaluates the profit a business makes after paying the cost of goods sold.

Net margin is a ratio of a company’s net profit to its total sales. It indicates the percentage of sales revenue left by the company after all expenses have been paid, excluding income taxes.

Management Ratios

Management ratios track how well you are managing your working capital. How fast are you in replacing stock? How often do you pay your suppliers? How often do you collect debts outstanding from customers? Management ratios help to answer these questions.

You can compare your management ratios to other businesses within your industry to know how you can improve your business performance. You can use the ATO’s Business performance check tool to check where your company stands among competitors in the same industry.

Balance Sheet Ratios

Common balance sheet ratios include return on investment and return on assets. These ratios will show you how efficient and effective your investment is in the business.

Return on assets shows how well businesses generate profits from the assets applied in the business. The ratio only has meaning when compared to other companies’ ratios in similar industries.

Return on investment (ROI) helps you determine the profitability of your investment. It shows how a business uses its total assets to generate sales.

Stay On Top of Your Billing and Obligations

Create a process for invoicing your customers. Your clients won’t send payments early if you don’t invoice them on time. Be consistent with your billing to quickly receive payments and meet your financial obligations. A weak link can jeopardise the overall chain, and you could pay fees if you make late payments.

Always pay your bills, be it mortgage or rent payments, credit cards, tax payments, payroll, utilities, loan repayment, and vendor bills. Don’t forget that payroll is not just a financial obligation, as many laws govern it too. Pay your employees on time because their lives depend on it. Once you make any payment, record it in your books.

Set Aside Funds for Emergencies

People cannot predict global crises, but they can prepare for them. For instance, no one thought Covid-19 would affect businesses the way it did. The pandemic sent workers home and destroyed the supply chain for businesses that remained open. Issues in the supply chain often increase business costs, and you can cover these expenses with emergency help.

Collecting loans from banks, family members, or friends can take time. You can begin by building at least three months to one year’s expenses. With this, you’ll have funds at hand to handle any emergency that comes. You can use the funds to hire employees or invest in business opportunities. But ensure you use the money only when necessary.

Keep Personal, and Business Expenses Separate

Entrepreneurs often fail to separate their personal and business funds. Remember that knowing your numbers is one of the ways to determine a financially healthy business. But if you mix up your personal and business money, it becomes difficult to monitor.

Keeping a clean record allows you to see your profits and losses without interfering with personal expenses and income. You should set up a business bank account and open a business credit card. Doing this helps you get clean records and shows you where your funds are coming from and where they are going.

A financially healthy business clearly shows where you should invest and where to cut costs based on your immediate financial status. It helps business owners determine various strategies that will help propel their businesses.

During your business’s infancy, try to make good financial decisions right away. When you make positive financial decisions early, you’ll reap the rewards of your efforts fast. Your financial reports are what will guide you into making the right decisions.

Do you have issues getting a clean record and need help in bookkeeping, payroll, or financial reports? Get Started with Visory today.

How to Manage Your Accounting as an E-Commerce Business

Starting an e-commerce business can be lucrative but comes along with some challenges. For instance, e-commerce accounting and bookkeeping can be complex and tedious. But keep in mind that these activities are among the dominant pillars in the success of your e-commerce business. Managing your finances correctly will help dictate the future of your business.

E-commerce accounting and bookkeeping also help you keep track of your income and expenses. When you keep your financial house in order, you can explore and expand other business areas.

What Is E-Commerce Accounting?

E-Commerce accounting is the process of collecting, analysing, managing, and reporting financial data regarding business transactions and assets in an e-commerce business. E-commerce is like any other industry, and managing financial data is important in making financial decisions in your business.

Evaluating financial data helps determine whether the business is on track for success or headed for financial difficulty In addition, you will categorise your financial transactions to help determine income and expenses. Below are key terms used in e-commerce accounting:

Purchase Order

This is a legally binding document that states the quantity and type of items a client intends to purchase. It also indicates the prices for the items to be purchased. Remember that this is not a payment, but the payment details must be incorporated.

Sales Order

This document is a response to the purchase order prepared by the seller. It showcases all the details of a sale and should incorporate client information, type and quantity of goods, payment information, date, and delivery address.

Cost of Goods Sold (COGS)

COGS refers to the collective cost of production and distribution of the products. The cost of goods sold entails costs such as shipping, storage, and credit card fees, to name a few. It does not include payroll, office space, software licenses, or marketing costs.

Categories of E-Commerce Accounting

E-commerce accounting is like any other business accounting, which requires preparing and managing financial information and tax management. There are three main e-commerce accounting categories: bookkeeping, reporting, and submitting tax returns.

Bookkeeping

Bookkeeping is imperative in business planning and operations. It helps assess balance sheets, inventory management, income, and expenditure. When you do not track your bookkeeping properly, you can experience difficulties analysing sales, inventories, tax records, and expenses.

Submitting Tax Returns

Numerous mistakes can arise when lodging and interpreting tax requirements. This may seriously impact your business, but e-commerce accounting helps you plan and prepare for these taxes. You will be able to track and lodge all applicable federal and state taxes with ease.

Reporting

After analysing your books and lodging required tax returns, reporting is essential in helping plan for growth. It is also the perfect instance for gathering all the necessary information required to scale your e-commerce business. This is important in defining your business goals as you have answers to questions such as:

  • The most profitable products and services for your business
  • Expenses that consume most of the expenditure
  • How to increase your profit over time
  • Other ideas that can be incorporated into your business to boost profit margins

When you have adequate data for your business progress, you will also decide whether to venture into new opportunities or rather improve current undertakings. 

Basics of Accounting in E-Commerce

1. Track Your Cash Flows

Watching your cash flow helps determine the direction that your e-commerce business is heading. It will help you determine whether your business is making a profit or loss. You should ensure that more money is coming in than going out. Additionally, have targets in the amount you intend to spend within a certain timeframe. A separate business bank account is critical to tracking your cash flow.

2. Purchase an Accounting Software

Most people will use tools such as a calculator and excel to execute e-commerce accounting. Accounting software is more reliable as it will help you track costs, sales, and inventories, with many now integrating with ecommerce platforms directly. There are many available accounting software tools in the market. Choose the one that aligns with your business needs and preferences to get the best results.

3. Compute All the Expenses

There are different expenses in an e-commerce business, such as the cost of goods sold, among other related costs. There are also others referred to as fixed expenses that do not go up when you make sales or decrease when the sales are low. These may be factors such as rent, utilities, insurance, property tax, and salaries. However, they must be factored in when calculating all the expenses. Understanding the costs incurred when running your business is important.

4. Monitor Your Sales and Profit Before Tax

Monitoring your sales before paying taxes will provide early indicators of any issue. It is also important in managing your money. In case there are any issues, you will have time to engage different strategies to ensure you steer towards your long term goals.

5. Plan for Your Tax Payments

Tax payments are determined by a number of different factors. Similarly, tax deductions can vary depending on your size, industry, location, and the type of work you complete. It’s always best to plan and prepare your taxes within the acceptable time frames to avoid hurting your business in the future due to fines or underestimated tax payments. Running a tax report will help you incorporate your taxes into your prices, should they be needed.

Bottom Line

E-Commerce accounting is an important element of your business model. This is because it helps you keep track of your business goals, fix any trouble areas and decide on further business expansion. You will also be able to manage your cash flow, expenses, and income seamlessly.

Visory helps your E-commerce business supercharge your business. They help you eradicate the daily spreadsheets and streamline your bookkeeping, accounts, and payroll services. This is vital in having a bigger picture of your business growth. 

Get started with Visory today to reap the rewards of convenient e-commerce bookkeeping and accounting.

15 Key Small Business Financial Ratios to Track

How is your business performing? Your answer should be based on rock-solid data and figures. We get it. Crunching the numbers and using financial ratios isn’t the exciting part of your business. Yet it’s necessary to ensure your business is financially healthy. You don’t want to grow in darkness and shoot aimlessly if you desire to grow and expand.

Financial ratios commonly fall into four categories: Profitability, Liquidity, Debt, and Operational Efficiency. Let’s dive deeper into the common ratios in these groups. These financial ratios can give you vital indicators about the health of your business.

Profitability Ratios

These ratios show your company’s ability to bring in profit:

1. Gross Profit Margin

Gross profit margin determines the profit you’re left with after paying the cost of goods (and not other expenses). The ratio indicates if your average markup on your items is sufficient. You want to remain with enough money to deal with expenses and still make a profit.

Gross profit margin = (Sales- Cost of Goods Sold) ÷ Sales = Gross Profits ÷ Sales

2. Net Profit Margin

The net profit margin is the percentage of sales remaining after you’ve paid all expenses, taxes, and the cost of goods or services. It’s among the KPIs that indicate whether or not your business is on the right path to success.

Net Profit Margin = Net Profits After Taxes ÷ Sales

3. Operating Profit Margin

Operating profit margins determine how efficiently you manage and control costs in your company. The higher the ratio, the better the cost controls.

Operating Profit Margin = (Gross Profit – Operating Expenses) ÷ Sales x 100

4. Return on Equity

Return on Equity determines the rate of return investors receive from an investment after taxes.

Return on Equity = Net Profit ÷ Shareholder’s Equity

Debt Ratios

These ratios indicate how your firm uses debt to ensure operations are running effectively.

1. Debt to Asset Ratio

The debt to asset ratio is the percentage of your total assets funded by your creditors. That means you could be in trouble if the ratio is high. 

Debt Ratio= Total Liabilities ÷ Total Assets

2. Debt to Equity Ratio

The debt to equity ratio indicates your business’ ability to settle loans. It’s the percentage of your liabilities covered by your shareholder’s Equity.

Debt to Equity Ratio = Total Liabilities ÷ Shareholder’s Equity

3. Times Interest Earned Ratio

The times interest earned ratio determines your business’s ability to settle contractual interest payments. An attractive ratio shows your business’ ability to pay the interest.

Times Interest Earned= Earnings Before Interest & Taxes ÷ Interest

Liquidity Ratios

Liquidity ratios indicate your company’s ability to meet short-term debt obligations without raising extra capital.

1. Operating Cash Flow Ratio

This ratio indicates your business operations’ cash flow to its current debt. It indicates how liquid your business is in the short term because it links cash flow with its current debt.

Operating Cash Flow Ratio = Cash Flow From Operations ÷ Current Liabilities

If the ratio is below 1, your business lacks enough cash flow to settle its short-term debt. It could indicate that you might be unable to continue operating. 

2. Current Ratio

The current ratio shows whether or not your business can settle its short-term (or current) liabilities. It’s more accurate if the inventory is liquid. 

Since current assets and liabilities are short-term, you expect to turn those assets into cash and pay off those liabilities within a year. 

Current Ratio = Current Assets ÷ Current Liabilities

3. Quick Ratio

Also known as an “acid test,” a quick ratio is similar to the current ratio but excludes inventory. The ratio is a good indicator in instances where it’s hard to convert inventory into cash. While a ratio of 1 is recommended, the figure varies by industry. 

Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities

Operational Efficiency Ratios

Operational efficiency ratios shine a light on your firm’s primary activities. You determine them using data from your income statement and balance sheet.

1. Inventory Turnover

The inventory turnover ratio points out how your business turns inventory into cash. 

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

To get the average inventory, add a specific period’s inventory balance to the previous period’s inventory balance and divide the result by 2. The period can be a quarter, for example.

2. Accounts Receivable Turnover

Accounts receivable turnover indicates how you’re managing your collections. A high figure usually shows that clients are settling their debts quickly. 

Accounts Receivable Turnover = Net Annual Credit Sales ÷ Average Accounts Receivable

To determine average accounts receivable, add starting to ending receivables over a period and divide by 2. 

3. Revenue Per Employee

You need to know your employees’ efficiency and productivity levels. A revenue per employee ratio helps you ensure that you’re managing your workforce efficiently. And benchmarking the figure against similar firms is recommended.

Revenue Per Employee = Annual Revenue ÷ Average Number of Employees in the Same Year

4. Return on Total Assets

This ratio points to how efficient your business assets are in generating profits.

Return on Total Assets = Net Income ÷ Average Total Assets

To determine average total assets, take the sum of starting and ending assets over the year and divide it by 2.

5. Average Collection (or Debtor Days)

Average collection approximates the duration it takes for your clients to meet their obligations. 

Average Collection = 365 X (Accounts Receivable Turnover Ratio ÷ Net Credit Sales)

Where net credit sales= Sales –Sales returns- sales allowances

Let Visory Handle the Calculations

Financial ratios reveal a snapshot of your business, helping you understand its health at a particular point in time. You (the business owner), lenders, and investors want to look at those figures to make decisions. That’s why you need to crunch those numbers.

But if your plate is already packed full with other equally crucial tasks, you need a helping hand. That’s where Visory steps in.

It’s time to dump daily spreadsheets. Bring Visory’s team of experts to manage and streamline your bookkeeping, payroll, reporting, and account tasks so you can return to big-picture business growth. 

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